What is the Home Affordable Modification Program & What is a Loan Modification?

The Home Affordable Modification Program , also known as HAMP is program that was designed to provide short term relief to those with financial hardship and the borrower is behind on their mortgage payments. HAMP loans are often confused with HARP loans, which is a refinance program for those who are current on their mortgage but owe more than the house is worth.

A loan modification is where your lender makes a permanent change in your existing mortgage terms, usually to help those who are behind on their mortgage in the short term, so they can get caught up and keep their home and reduce their monthly mortgage payments. Mortgage loan modifications typically result in taking the amount a borrower is behind plus legal fees and adding that amount on to the mortgage principal for eligible homeowners.  This helps homeowners so they do not have to come up with all of the past due payments, taking them out of foreclosure with a reduced payment and enabling homeowners a fresh start. 

The HAMP program is a federal program that works for those with a Fannie Mae or Freddie Mac loan. Those with a government backed loan, such as FHA, or VA, may still qualify for a loan modification.  mortgage servicer will gather a borrowers updated financial information and work to reduce the interest rates on a mortgage,  typically moving borrowers from an adjustable-rate mortgage and moving them to a fixed-rate mortgage. Then they and put the delinquent payments into a lump sum and spread them out over the life of the loan. This program works on sub-prime loans but does not work with most private lenders.

Loan modifications are great for people who want to keep their home but suffered from financial hardship and want to keep their homes.  The loan modification process requires completing a loan modification application along with a hardship letter and updated financials. Loan modification requirements typically require homeowners to be behind on their mortgage at least 60 days. It is important to keep in mind, that just because you submit a loan modification request, not all modifications are approved and must meet your mortgage lenders underwriting guidelines to qualify for loan terms.

Loan Modification Benefits

Loan modifications are a great way to stop foreclosure in Illinois because they enable homeowners the ability to keep their homes and stop the foreclosure process. Loan modifications can be used to stop a foreclosure sale date, if submitted and before the sale date. Loan modifications are federal programs and must meet lender guidelines. Most lenders have internal requirements in order to stop the foreclosure process, so it is best to submit your paperwork before waiting for the last minute.  While our office has had much success helping many clients before it was too late, we recommend those with financial hardships take immediate action.

In order to qualify for a loan modification, one is given a trial payment plan to make sure borrowers can afford the payments. Upon successful completion of a trial period, a mortgage loan modification is usually given. Modifications can be performed on the following loan types:

  • Conventional Mortgage
  • FHA Mortgage
  • VA Mortgage
  • Jumbo Mortgage
  • Subprime Mortgages
  • Second Mortgage

What to do if your loan modification was denied?

If you have a denied loan modification, you may be eligible for a re-submission.  Most loan modifications are denied for a number of reasons. The most common reasons are because they either were not submitted properly, contain errors or are incomplete or simply do not meet lender guidelines. When seeking a loan modification, it is not required you seek counsel however we highly recommend it. Working with an experienced foreclosure attorney will give you the upper hand when dealing with your lender and may help you attain a more favorable outcome.

Loan Modification Pros and Cons

As with anything in life, there are usually advantages as well as disadvantages. In this section, we will discuss both so you can make an informed decision.  Unfortunately when most people have their back against the wall, they don’t always make the best decisions. We don’t want that to happen to you, so make sure to read this section.

Depending on how far behind a borrower is when getting a loan modification, it is important to consider a few things.  Many people have emotional attachment to their homes for various reasons. A home should not have an emotional string binding you to it.  Here are some tips to consider when determining if getting a modification is right for you or not.

First, it is important to consider the value of the home in comparison to the total debt on the property. Many times, the balances (especially on those with serious delinquency) can have have mortgage balances that are far greater than the actual value. While keeping your home may be a priority, sometimes it is not financially beneficial to keep the home.  You must look at the total amount owed on the property in relation to it’s worth and make an honest and realistic assessment if the home has a chance of recovering in the immediate near future.

Second, compare your estimated payment to what rents would be on comparable homes in your neighborhood.  If your payment is going to be substantially higher than alternative rent costs, it may not be worth keeping, especially if your upside down on the property value.

Getting a loan modification can help you get out of a bind, help you stop foreclosure and keep your home. It can also potentially lower your current mortgage payment, give you some time off without making mortgage payments and allow you some time to get caught up with other financial obligations so when your loan is approved, you will not have as large a burden.

The moment you miss your first mortgage payment, your credit score will drop and it may continue to drop with further missed payments, notice of default and other blemishes. It is important to note that the moment you miss your first mortgage payment, most lenders will not even consider refinancing your loan for at least 12-48 months after the last missed payment (depending on lender).  

Getting a loan modification may drop your credit score a little upon the acceptance of the loan, however, it is important to know that with continued payments, your credit score may improve nicely after a number of successful on time payments. Most people’s credit scores actually improve 12 months after their modification, than before the actual process starts. Therefore getting a loan modification can have a number of additional benefits aside from just lowering your monthly payment and stopping the foreclosure.

Depending on the outcome of your mortgage, there may be some tax consequences along with the modification.  We are not tax advisers and the information presented on this website are for illustration purposes only. Please consult a tax adviser for more information on how a modification may impact your tax burden.  

You may incur a greater income tax bill if a portion or all of your mortgage  is forgiven or settled for less than is owed. Furthermore, your income tax liability may increase if the amount you are paying in interest is reduced after a modification. All in all, it is important to consider the impact a modification or settlement may have on your taxes.

Another disadvantage of a getting a modification may result in having your term extended out. If you have a 30 year loan and get a modification after 10 years of on time payments, your mortgage may get extended back out to another 30 years. While this may help lower your payment in the short run, it may increase the length of time you are paying on the mortgage. While having the term extended on your mortgage may put a damper on your retirement, it may mean the difference of losing your home or being able to stop the foreclosure process.

As you can see there are a number of benefits to getting a loan modification. It is imperative you take all the considerations into place before getting a loan modification. A good foreclosure attorney should be able to help determine whether a loan modification is a good fit for your situation. Contact us for a free consultation.